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Financing Franchises with the SBA 504 Loan Program

Feb 2022

In 2019, there were 773,603 franchise establishments in the United States. Small business owners thinking about purchasing a franchise should take a serious look at the Small Business Administration (SBA) 504 Loan Program for the real estate and equipment components of the project.

The SBA maintains a Franchise Directory with all franchises and other brands eligible for SBA 504 financing (franchise fees are not eligible). The Directory includes brands the SBA has determined are eligible under SBA affiliation rules and other eligibility criteria. If the applicant's brand meets the FTC definition of a franchise, it must be on the Directory in order to obtain SBA financing.

The Directory resides on the SBA's website and contains the following information:

Whether the brand meets the FTC definition of a franchise;

• An SBA Franchise Identifier Code, if applicable;
• Whether an addendum to the franchise agreement is needed and, if so, whether the franchisor will use the SBA Addendum to Franchise Agreement (SBA Form 2462) or an SBA Negotiated Addendum; and
• Whether there are additional issues the SBA lending partner must consider with respect to the brand.

For businesses offering multiple brands, at least 51% of the revenue accountable to brands must be on the directory or cleared by the SBA. Management agreements also will be added to the Directory as cleared. These agreements are commonly used in the hotel industry and businesses offering medical services.

For applications involving a franchise or similar relationship, before submitting the application to SBA for non-delegated processing or approving the loan under delegated authority, SBA 504 lending partners and the Certified Development Company (CDC) must check the Directory to determine if it includes the applicant's brand.

If the brand is on the Directory, the lending partner or CDC can proceed with processing the application. If the brand is not on the Directory, then the application cannot be processed. If the applicant's brand is not on the Directory, a franchisor must request the SBA add its brand to the Directory.

For questions regarding a brand, contact the SBA at franchise@sba.gov.

The SBA 504 Loan Program provides up to 90% financing at below-market, fixed interest rates and long amortization terms up to 25 years for the purchase of major fixed assets, such as owner-occupied commercial real estate, renovations, new construction, energy efficient “green” initiatives and/or fixed heavy duty machinery and equipment, as well as the refinance of commercial mortgage and other business debt with or without a cash-out option.

504 loans are paired with private-sector commercial loans and provide up to $5 million of aggregate SBA eligibility on standard 504 projects; up to $5.5 million per 504 energy efficient green project not exceed $16.5 million in the aggregate; and up to $5.5 million per eligible small manufacturing project with no limit on total SBA dollars available. These are SBA 2nd mortgage loan portions only; there is no limit on overall project dollar size.

For more information about SBA 504 loans in Alabama, Florida or Georgia, contact a Florida First Capital Loan Officer or email us at info@ffcfc.com. Phone: 850.681.3601 or toll-free at 888.320.5504.